# R. B. SETH JESSARAM FATEHCHAND v. OM NARAIN TANKHA & ANR

- **Citation:** [1967] 2 S.C.R. 429
- **Court:** Supreme Court of India
- **Decided:** 1967-01-19
- **Case number:** Civil Appeal No. 891 of 1964
- **Bench:** K. N. Wanchoo, R. S. Bachawat, J.M. Shelat
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/r-b-seth-jessaram-fatehchand-v-om-narain-tankha-anr-3985
- **Pages:** 8

## Headnote

Trust-Security deposited with co1npany
by sole selling agent-Interest payable by company-Deposit allowed to be mixed with other funds
-Deposit whether held by company as trustee-Matters to be taken into
consideration.
The appellant firm was appointed sole selling agent of a sugar manufacturing company and deposited Rs. 50,000 as security for due performance of the contract; this amount wao to carry interest at 6 per cent
per annum. There was no restriction on the use of the said depoS1t by the
company. According to cl. (9) of the agreement the security and mterest were to be refunded at the termination of the apency; in default of such
payment the appellant firm was entitled to a commission as if agency
had not terminated.
The clause further said that "as lon,g as security
with interest is not refunded and commission due is not pt.id this agree---
ment will not be terminated." The company was ordered to be wound up
befote the period of agency came to an end. Consequent on the winding
up the appellant made an application praying for refund of its security
deposit along with interest. It was contended that as the company held
the amount of deposit as a trustee the appellant was entitled to priority
among the creditors. On behalf of the liquidators it was denied that the
amount deposited was in the nature of a trust entitled to preference over
other debts. The company judge held that the amount was an ordinary
debt. The Division Bench of the High Court also deci<ied against the
appellant.
In appeal by special leave to this Court.
HELD:
The deposit did not amount to a trust.
The question whether the security deposit in a particular case can be
said to be impfessed with ·a trust will have to be decided on the basis of
the terms of the agreement and the facts and circumstances of each case
without any leaning one way or the other on the fact that the money
was given as a security dePosit. [434 CJ
If a trust can clearly be spelled out from the terms of the agreement
that ends the matter. But if the trust cannot be spelled out clearly the
fact that there was no segregation provided for, and the fact that interest
was paid, would go a long way to show that the deposit was not impressed
with the character of a trust particularly when the person with whom the
deposit was mape could mix it· with his own money and could use it for
himself.
In such a case the inference would be that the relationship between the parties was that of a debtor and creditor. Further besides these
circumstances, if there is any other term which suggests one kin<l of relationship rathe·r than the other that will also have to be taken into account.
[436 B-C]
In the present case the company was free to use the money for its
own purpose and had to pay interest on it.
Further, in cl. (9) of the
agreement the security was put on a par with the commission which was
nothing but a debt.
The courts below had therefore rightly treated the
security deposit as an ordinary debt. [436 Fl
Peter Donahf Macpherson v. Dugald Mckechine and Ors.
XXVIII
(1923-24) Cal. W.N. 721. In the matter of Travancore Natfonal and
430
SUPREME COURT REPORTS
[1967) 2 s.c.a.
Qui/011 Be111k Li11Jitecl, Official Liquidators and A1101her App/ican1s, A.J.R.
1939 ~-fad. 337, Jn re Mn11<'kji Petit Man14fac1urif!g Compc,ny Ltd. A.LR.
1932 Born. 31 l, Ma/ie.'ihir11ri Brothers v. Official Liquidalors, l.l.R. ( 1942)
All. 242. Kesh<tra Mo/ia,, Das v. D. C. Basu, I.LR. [1943] 1 Cal. 313.
Gee v. Liddell, (1866) 55 E.R. 1038, K1u11chhull v. Hallett, (1879-80)
XIII Ch. D. 696. /11 re llnlle// & Co., [1894] 2 Q.B.D. 237 and
Frank
M. Mckey v. Maurcie Paraclixe, 81 L. Ed. 75. referred to.

## Text

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R. B. SETH JESSARAM FATEHCHAND
v.
OM NARAIN TANKHA & ANR.
January 19, 1967
(K. N. WANCHOO, R. S. BACHAWAT AND J.M. SHELAT, JJ.]
Trust-Security deposited with co1npany
by sole selling agent-Interest payable by company-Deposit allowed to be mixed with other funds
-Deposit whether held by company as trustee-Matters to be taken into
consideration.
The appellant firm was appointed sole selling agent of a sugar manufacturing company and deposited Rs. 50,000 as security for due performance of the contract; this amount wao to carry interest at 6 per cent
per annum. There was no restriction on the use of the said depoS1t by the
company. According to cl. (9) of the agreement the security and mterest were to be refunded at the termination of the apency; in default of such
payment the appellant firm was entitled to a commission as if agency
had not terminated.
The clause further said that "as lon,g as security
with interest is not refunded and commission due is not pt.id this agree---
ment will not be terminated." The company was ordered to be wound up
befote the period of agency came to an end. Consequent on the winding
up the appellant made an application praying for refund of its security
deposit along with interest. It was contended that as the company held
the amount of deposit as a trustee the appellant was entitled to priority
among the creditors. On behalf of the liquidators it was denied that the
amount deposited was in the nature of a trust entitled to preference over
other debts. The company judge held that the amount was an ordinary
debt. The Division Bench of the High Court also deci<ied against the
appellant.
In appeal by special leave to this Court.
HELD:
The deposit did not amount to a trust.
The question whether the security deposit in a particular case can be
said to be impfessed with ·a trust will have to be decided on the basis of
the terms of the agreement and the facts and circumstances of each case
without any leaning one way or the other on the fact that the money
was given as a security dePosit. [434 CJ
If a trust can clearly be spelled out from the terms of the agreement
that ends the matter. But if the trust cannot be spelled out clearly the
fact that there was no segregation provided for, and the fact that interest
was paid, would go a long way to show that the deposit was not impressed
with the character of a trust particularly when the person with whom the
deposit was mape could mix it· with his own money and could use it for
himself.
In such a case the inference would be that the relationship between the parties was that of a debtor and creditor. Further besides these
circumstances, if there is any other term which suggests one kin<l of relationship rathe·r than the other that will also have to be taken into account.
[436 B-C]
In the present case the company was free to use the money for its
own purpose and had to pay interest on it.
Further, in cl. (9) of the
agreement the security was put on a par with the commission which was
nothing but a debt.
The courts below had therefore rightly treated the
security deposit as an ordinary debt. [436 Fl
Peter Donahf Macpherson v. Dugald Mckechine and Ors.
XXVIII
(1923-24) Cal. W.N. 721. In the matter of Travancore Natfonal and
430
SUPREME COURT REPORTS
[1967) 2 s.c.a.
Qui/011 Be111k Li11Jitecl, Official Liquidators and A1101her App/ican1s, A.J.R.
1939 ~-fad. 337, Jn re Mn11<'kji Petit Man14fac1urif!g Compc,ny Ltd. A.LR.
1932 Born. 31 l, Ma/ie.'ihir11ri Brothers v. Official Liquidalors, l.l.R. ( 1942)
All. 242. Kesh<tra Mo/ia,, Das v. D. C. Basu, I.LR. [1943] 1 Cal. 313.
Gee v. Liddell, (1866) 55 E.R. 1038, K1u11chhull v. Hallett, (1879-80)
XIII Ch. D. 696. /11 re llnlle// & Co., [1894] 2 Q.B.D. 237 and
Frank
M. Mckey v. Maurcie Paraclixe, 81 L. Ed. 75. referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 891 of 1964
Appeal by special leave from the judgment and decree dated
October JO, 1961 of the Allahabad High Court in Letters Patent
Appeal No. 83 of 1951.
N. C. Clral/erjee, B. C. Mishra, B. R. G. K. Achar and M. V
Gos ... ami, for the ;ippellant.
C/Jaman Lal Pandlri and S. L Pandhi, for the respondents.
The Judgment of the Court was delivered by
Wancboo, J. This is an appeal by special leave
ag~;nst
the judgment and decree of the Allahabad High Court. The
appellant is a registered partnership carrying on business at Kanpur.
It entered into an agreement in December 1948 with the Vijia
Lakshmi Sugar Mills Limited, Doiwala, District Dehra Dun (hereinafter referred to as the Mills) and was appointed sole selling agent
of the Mills. According to the terms of the agreement, the appellant
deposited a sum of Rs. 50,000/- as security for due performance of
the contract, and this amount was to carry interest at the rate of
Rs. 6/- per cent per annum to be paid by the Mills.
In November
1949 an order was passed winding-up the Mills and this happened
before the period of agency came to an end. Consequent on the
winding-up of the Mills, the appellant made an
application in
September 1950 by which it prayed for refund of security deposit
along with interest.
It was also prayed that the Mills held the
amount of deposit as trustee and in consequence the appellant was
entitled to priority with respect to the amount of Rs. 50,000/-.
Jn
addition, there was a claim of Rs. 24,500/- with respect to commission. That claim was given up and we are now not concernd with
it.
The liquidators admitted that there had been an agreement as
alleged by the appellant and that a sum of Rs. 50,000/- had been
deposited with the Mills. But their case was that this amount
was an ordinary debt with respect to which the appellant cou Id
not clai-n any preference and that the appellant's contention that
the amount deposited was a kind of trust with the Mills was not
correct. The only question that had to be decided therefore was
whether the amount of Rs. 50,000/- deposited as security for due
performance of the contract of sole selling agency was in the nature
of a trust which was entitled to preference or was an ordinary
debt.
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SETH JESSARAM v. OM NARAIN (Wanchoo, /.)
431
The learned Company Judge held on a construction of the
agreement that the amount was an ordinary debt. He referred in
this connection to the apparent conflict between the decisions of the
Calcutta and Madras High Courts on one side and the Allahabad
and .Bombay High Courts on the othe!' but was of opinion that this
conflict was largely illusory as the question whether the deposit in a
particular case was in the nature of a trust or was an ordinary debt
depended on the facts and circumstances of each case. He finally
held that the deposit in question was not in the nature of a trust
and was not entitled to any preference on that ground.
The appellant then went in appeal to a Division Bench. The
Division Bench upheld the view taken by the learned Company
Judge and dismissed the appeal. The High Court having refused
to grant a certificate, the appellant applied for an obtained special
leave from this Court, and that is how the matter has come before
us.
The two main terms of the agreement, viz., Nos. 8 and 9, between the appellant and the Mills which call for consideration in the
present case are these:-
"(8) That the firm has deposited sum of Rs. 50,000/-
with the said Mill as a security for the due performance
of the contract on their part, on which amount the Mill
shall pay interest to the said firm at the rate of 6 per cent
per annum.
"(9) That the Mill shall refund the said security deposit of Rs. 50,000/- with interest thereon at the rate on
terniination of the agency. In case the said amount is not
refunded with interest thereon the firm shall be entitled to
commission at the rates mentioned above as if agency has
not terminated. In other words as long as security with
interest is not refunded and commission due is not paid
this agreement will not be terminated."
It may be mentioned that the agreement was for a period of one
year which, as already indicated, had not expired before the windingup order was passed on November 8, 1949.
It will be seen from the terms of the agreement already set out
that there was no stipulation that the amount of Rs. 50,000/ deposited
as security would be kept as ·a separate fund by the Mills and it
would not use it for its own purposes. On the other hand, it is
clear that interest had to be paid and there was nothing in the agreement to prevent the Mills from using the money as its own so long
as it paid interest on it. It is true that the money was to be refunded along with interest on the termination of the agency, but
cl. (9) further provided that in case the money was not refunded
after one year, the appellant would be entitled to commission as if
SUPllEMI! COU&T
llBPO&TS
(1967) 2 S.C.&.
the agreement had not terminated. As the agreement itself puts it,
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it will remain alive even after the period of one year so long as the
security with interest was not refunded and the commission due was
not paid. The last words of cl. (9) of the agreement put the security deposit and the commission due on the same footing.
It is
because of this provision that the learned Company Judge held that
as the s~curity deposit and the Commission due were put on the
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same footing and the commission could only be a debt, the security
deposit in the circumstances of this agreement could not be treated
on a higher footing. It seems to us that the view taken by the
learned Company Judge so far as this agreement is concerned (which
was upheld by the Division Bench) is correct.
We may now refer to the apparent conflict between the Calcutta
and Madras High Courts on one side and the Allahabad and Bombay
High Courts on the other. on this question. The represrntative
cases on one side are: (i) Re: Alliance Bank of Simla: Peter Donald
Macpherso11 v. DuKald Mckechnie and others,( 1) and (ii) In the
111a11er of Trm·ancore Na1iom1/ and Qui/on Bank Limited, Official
Liquidators and other applicant.!(2). On the other side the cases are
(i) In re: Ma11ekji Petit Manufacturing Company limited(') and
(ii) Mahesh1rnri Brothers v. Official liquidators('). The two Calcutta
and Madras cases seem to take the view that where there is a deposit
there is creation of some kind of trust even though the deposit may
carry interest and the person with whom the deposit is made is entitled to use the money as his own. It may however be mentioned
that the Calcutta case was with respect to provident fund of the
employees of a bank which went into liquidation while the Madras
case was with respect to security deposit by an employee of a bank
for due performance of his duties. It may be added that such cases
were later provided for specifically by the amendment of the Indian
Companies Act (No. VII of 1913) which was made in 1936 and by
which s. 282-B was added to the Companies Act along with cl. (e)
in s. 230( I) of the same Act.
Even so, these two cases make it
clear that the proper approach to the question is to ask whether on
the interpretation of the document. if there is one, or from proved
or admitted facts and circumstances a trust is established or not.
If a trust is established, a provision for payment of interest by the
trustee does not destroy the character of the trust nor does the fact
that the money is not segregated.
The matter was again considered by the Calcutta High Court
in Kshetra Mohan Das v. D. C. Basu(') in connection with a deposit
made by a sole selling agent and the principle for deciding whether
the deposit was in the nature of a trust or a loan was put thus:
(I) xxvm (19Z3-24) Cal. W.N. 721.
(2) A.LR. 1939 Mad. 337.
(3) A.l.R. 1932 Born. 311.
(4) l.L.R. (1942) All.24.
(5) I.L.R. (1943) I Cil. 313.
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SETH JESSARAM v. OM NARAIN (Wanchoo, I.)
433
"If the security deposit of an employee or an agent of a
company in the hands of such company can be regarded as
impressed with trust or held in a fiduciary capacity by such
company then such employee or agent is entitled to get back
· the whole of the security deposit even after such company
goes to liquidation. . . . . . . . In the absence of such trust
or fiduciary relation the employee or the agent of the
company in liquidation is merely a creditor of the company
and must share the assets pro rata with other creditors."
·There canin our ·opinion be no disagreement with the principle so
enunciated, and the conclusion whether the deposit is in the nature
of a trust or a loan will depend upon the facts and circumstances of
each case, particularly on the terms of the agreement if there is one
in writing. The difficulty however arises in the application of the
principle to particular cases. But the Calcutta and Madras High
Courts seem to lean to the view that where there is a security deposit
it will generally be in the nature of a trust.
This brings us to the cases on the other side. The Bombay
High Court in Manekji Petit's case(I) was also considering the
case of a deposit by an agent. It considered the terms of the agreement which provided for Rs. 6/- per cent interest. Ordinarily the
company was entitled to use the deposit as it thought fit, but there
was a provision in the agreement that in the event of the company
raising a loan secured by debentures of the company or by mortgaging company's property, the moneys deposited by th~ agent were
to be forthwith invested in Government securities and to be ear,
marked in some manner satisfactory to the agent. It was held
on the basis of this last clause in the agreement that there could be
no trust till the contingency provided therein came to pass. In
that case that contingency had not come to pass and the moneys
were mixed with the moneys of the company and used by it. The
Bombay High Court held that upto that stage there was no trust
created.
In Maheshwari Brothers(2), the question arose whether the
security deposited .by the agents for the fulfilment of their obligation under the agreement was impressed with trust. The Allahabad High Court considered the agreement and came to the conG
clusion that as interest was provided and further as the company
was entitled to use the deposit as its own and lastly because a floating
charge was intended to be created on the assets of the company
which failed for want of registration, the deposit was not in the
nature of a trust. Thus absence of segregation and presence of
interest coupled particularly with a provision for a floating charg~
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which had failed for want of registration inclined the court to hold
that the deposit was not in the nature of a trust.
(I) A.l.R. 1932 Bom. 311.
(2) l.L.R. (1942) All. 242.
MlSup. Court./67-14
434
SUPJ.BME
COURT
llEPOllTS
(1967) 2 s.c.1..
It will thus be seen th:it the view of the learned Company
Judge that ihe conflict between the Calcutta and Madras High
Courts on one side and the Allahabad and Bombay High Courts on
the other is more apparent than real is borne out by the fact that in
each case the court considered the agreement to decide whether on
the terms thereof and facts and circumstances of the case the deposit
was impressed with a trust, though it must be admitted that the
conclusion reached was not the same.
We are of opinion that the question whether the security deposit
in a particular case can be said to be impressed with a trust will
have to be decided on the basis of the terms of the agreement and the
facts and circumstances of each case, without any leaning one way
or the other on the fact that the money was given as a security deposit. If the terms of the agreement, if it is in writing, clearly indicate that the deposit was in the nature of a trust, the court will come
to that conclusion in spite of the fact that interest is provided for
in the agreement. But where the tenns of the agreement do not
clearly indicate a trust, the court will have to cor.sider the facts
and circumstances of each case along with the terms to decide
whether in fact something in the nature of a trust was impressed on
the security deposit. In such a case the fact whether segregation
was provided for or not would be one circumstance to be taken
into consideration. Where segregation is provided for the court
would lean towards the deposit being in the nature of a trust. But
where segregation is not provided for and the deposit is pennitted
to be mixed up with the funds of the person with whom the deposit is made, the court may come to the conclusion that anything
in the nature of trust was not intended, for generally speaking in
view of s. 51 of the Indian Trust Act, (No. 2 of 1882) a trustee
cannot use or deal with the trust property for his own profit or
for any other purpose unconnected with the trust. It is true that
where there is a clear trust and the trust deed if any provides that
the trustee may use the trust property as he likes, the fact that the
trustee can mix the trust property with his own may not make any
difference. But where there is no dear indication that a security
deposit was impressed with a trust, absence of"segregati<>n would
be a circumstance against there being a trust.
Another circumstance which may have to be taken into account
in a case where the agreement does not indicate clearly that the
security deposit is impressed with a trust is the payment of interest.
Where there is no payment of interest provided for an inference
may be readily drawn that the deposit was in the nature of a trust.
But where the person with whom the deposit is made is to pay
interest it may be possible to infer that payment of interest is a
pointer towards there being no trust.
Further any other provision
in the agreement and any other circumstance as to the manner in
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SBTR JBSSARAM v. OM NAllAIN (Wanchoo, I.)
4 35
which the deposit was dealt with may also have to be taken into
account in coming to the conclusion whether the security deposit
in a particular case was impressed with a trust or not.
We may now refer to some English and American cases in this
connection. In Gee v. Liddell(!) the facts and circumstances of
the case were considered and it was held on those facts and circumstances that there was a trust. In that case £ 2,000 had been left
as trust by a will, but the executor who was the son of the testator
said that his father had intended to bequelith £ 3,000 and the question was whether the further £ 1,000 was also a trust. On the facts
and circumstances of that case it was held that as the amount bequeathed (namely, £ 2,000) was certainly a trust, the addition
of £ 1,000 to it by the executor would be of the same kind and would
be equally impressed with trust. That case also shows that where a
trust can be inferred clearly a provision for payment of interest
would be immaterial.
In re: Hallett's Estate, Knatchbul/ v. Hallett(2) it was hllld that
if a person held money in a fiduciary character but mixed it up with
his own account, the person for whom the money was held could
follow It and had a charge on the balance in the bankers' hands.
This case again shows ~hat the main question that courts have to
decide in such cases is whether on the facts and circumstances
a fiduciary relationship is established. If it is established, then the
fact that the money was mixed with the trustee's money may not
make any difference.
In re: Hallett & Co.,(3) segregation was the test used for the
purpose of deciding whether there was trust or not.
In Frank M. McKey v. Maurcie Paradise,(<) the question arose
with reference to a claim of an employee welfare association against
the employer and it was held that without segregating any money
as due to the association there could be no trust. This case shows
the significance of segregation in arriving at the inference whether
there was a trust.
A consideration of these English· and American cases also in
our opinion shows that the first question in each case where the court
is dealing with a security deposit is to ask whether on the agreement
in writing, if any, and on the facts and circumstances of the case
and conduct of the parties it can be said that the security deposit
was impressed with some kind of a trust. If that can be said then
the question whether interest was provided for and whether the
trustee could mix the deposit money with his own money would not
be of importance and would not take away the character of the deposit being impressed with a trust. The. mere fact that money was
deposited as a security is not sufficient to come to the conclusion
(I) (1866) SS B.R. 1038.
(2) (1879-80) XIll Ch. D. 6116.
(3) (1894) 2 Q.B.D. 237.
(4) tit L. Ed. 7S.
436
SUPllllOI CIOtJaT U1Cl&TS
(1967) 2 S.C.R.
that it must be treated as trust money. The court will have to look
to all the terms of the agreement if in writing and to the facts and
circumstances of the case and to the conduct of the parties before
(;()ming to the conclusion whether a security deposit was impressed
with a trust. If a trust can clearly be spelled out from the terms of
the agreement that ends the matter. But if the trust cannot be
spelled out clearly the fact that there was no segregation provided
for and the fact that interest was to be paid would go a long way
to show that the deposit was not impressed with the characti:r of a
trust particularly where the person with whom the deposit was
made could mix it with his own money and could use it for himself.
In such a case the inference would be that the relatio11,5hip between
tho parties was that of a debtor and creditor. Further besides
these circumstances if there is any other term which suggets one
kind of relationship rather than the other that will also have to be
taken into account. Illustrations of this will be found both in the
Bombay case (i.e. in Manekji's case)(') and in the Allahabad case
(i.e. Maheshwari Brothers' case(1). In the Bombay case besides
abstnce of segregation and presence of interest there was a further
fact that in certain circumstances segregation had been provided for.
The court was entitled to take that fact into consideration and hold
that the deposit was not impressed with trust till segregation took
place. In the Allahabad case a floating charge was created which
failed for want of registration, and that circumstance was also used
to show that the relationship between the parties was tbat of a
debtor and creditor and not that of a trustee and beneficiary.
Let us now apply these principles to the facts of the present
case. The facts show that there was no segregation in this case and
the Mills could mix the security deposit with its own money and
use it for its own purpose. Further because the Mills could use the
money for its own purpose, it had to pay interest. In addition to
these two circumstances which would incline one to the view that
tho relationship was that of a debtor and creditor, there is the further fact that cl. (9) of the agreement provides that even though
the period fixed in the agreement comes to an end, the agreement
would continue if the security deposit is not refunded and the commission due is not paid. We agree with the learned Company
Judge that the last words in cl. (9) make the security deposit and
(;()mmission due on a par. The commission due can be nothing
other than a debt; the security deposit is put on a par with that.
That is a further indication that the relationship in the present
case was that of a debtor and creditor. In the circumstances we
are of opinion that the High Court was right in its view as to the
nature of the security deposit in the present case.
The appeal therefore fails and is hereby dismissed with costs.
G.C.
Appeal dismissed.
(I) A.LR. 1932 Born. 311.
(2) LL.R. [1942) AIL 242.
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